Tag Archives: activist investor

Patent Holders Learn to Adapt to More Investor Scrutiny

With a greater role in more businesses’ performance, patent assets and strategy are going under the microscope.

The required disclosure and hyper-scrutiny that small public patent licensing companies are subject to may be starting to affect larger, more defensive IP holders, including Apple, Intel and Sony. The increased interest is more likely to benefit those that perform.

In “Reveal Thyself,” the latest Intangible Investor in IAM Magazine, out next week, I look at how the heightened awareness of some tiny IP-centric companies, many of them NPEs with an out-licensing model, is likely to affect larger patent holders with diverse business models. Here is an excerpt:

IP success is no longer a “trust me” proposition for the terminally confused. Value and performance must be explained, and respect earned. For smaller patent holders looking to make a mark with licensing revenue, as well as for larger ones protecting profit margins, the first rule IP reporting is the same: under-promise and over-deliver. 

Not all public IP companies (PIPCOs) are driven by a simple out-licensing or assertion model.  Some are operating companies that sell products and conduct 0tightrope walker1R&D. (Colleen Chien may choose to believe otherwise, but not all small patent-rich businesses have assertion covenant written into their charter. “Patent assertion entity” (PAE), as a term, presumes a business’ raison d’être is litigation. It is disturbing that some anti-patent forces are trying to make it the defacto term for “licensing businesses.” Private and public licensing companies are not “suing machines” by nature. Enforcement is rarely their first choice. Some learn how to do it really well because they have to to succeed. All operating companies are to some extent non-practicing ones, too. It would be impossible to practice all of the patents they hold.)

The Genie is Out of the Bottle

Like biotech and entertainment industry stocks before them, PIPCOs are complex, typically speculative business models that fascinate many, even though their returns may eventually only satisfy a few. Their survival is inevitably market-based, and subject to a harsh eco-system. (It’s difficult avoiding that term.)  Ultimately, competition will determine who survives — and, as evolution has proved, the strongest typically do. PIPCOs success, failure and cross-breeding will create more valuable assets and  durable business models for ideas and innovation. They also will help provide a greater understanding of innovation rights and how they can be deployed.

In today’s legal and legislative environment the key to business model success for patents may not be the “elephant hunter” hoping to bag the biggest prey. Lofty damages awards paid by Research in Motion, Microsoft, J&J and others, are a currently a relic of the past. Many large awards are reduced, retried and thrown out, and the economics and risk of patent litigation are less amenable to big game hunting.

If history is any indication, IP business model competition will be bloody but ultimately positive. Quality assets, good management and clear performance usually win out in the end not only in spite off the carcasses along the way, but also because of them.

Institutional investors, banks, pension funds and others are slowly becoming more familiar with the language and movements of IP performance. Their positions in smaller entities are among the driving forces, but so are is M&A, like Motorola’s sale to Google. Because PIPCOs are more directly affected by licensing and enforcement, and closely monitored for strengths and weaknesses, they may provide a better worthwhile, if more painful, learning experience.

Some investors may choose to look at larger patent holders through a similar lens. If it is inappropriate to do so then more relevant performance measures will have to be identified, such as market share maintained, profit margins protected and the number and cost of suits settled (or avoided). 

While not all patent-rich businesses or business models, small or large, are likely to succeed, focusing systematically on their performance is likely to lead to more robust survivors, and fewer disillusioned investors.

Image source: economictimes.com; marktomarket.com 

Battle Between Tessera and Activist IP Investor is Heating Up

Tessera says that Starboard Value wants to turn it from an R&D business into a patent “troll.”

The battle between activist investor Starboard Value and Tessera Technologies (NASDAQ: TSRA) took a nasty turn this week with Tessera publishing on May 6 a letter to shareholders explaining “the superiority of its IP business model” and how Starboard is determined to change it to a company that values lawyers over engineers.

Starboard, a 7.7% shareholder in TSRA countered on May 7 with its own letter to shareholders that “addresses some of the recent misleading statements, false allegations, and gross misrepresentations made by Tessera, and provides its views on the recent corporate governance manipulations carried out by the Company.”

Among the points Tessera raises in its letter is that Starboard would rather abandon the company’s $33 million R&D investment for more frequent and expensive litigation. tessera logo“Starboard’s strategy,” said Tessera, “can best be analogized as cutting down the apple tree to harvest the apples. In essence, Starboard wants to operate a business that seeks out defendants rather than customers.”

Tessera’s letter positively characterizes a list of Technology IP Licensing Companies with positive five-year operating margins, putting itself at the top, and names like Dolby, InterDigital, ARM Holdings and MIPS Technologies right behind. The letter calls RPX Corporation, Acacia Technologies and WiLAN “Patent Trolls,” and shows that they have weaker margins than the Licensing Companies, and no R&D to speak of.

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Tessera’s description of RPX, Acacia and WiLAN as poorly run predators is unfortunate and unlikely to improve its relations with shareholders.

So-called “black hat” NPEs who enforce dubious assets are fewer and further between than some would like to believe. It’s inaccurate to say that NPEs without R&D or product sales, who might settle quicker than others, are by nature equipped with lesser quality patents. It takes many different IP models to make an ecosystem, including those who may ask less for a license in court even though they may win more in a protracted litigation.

Tessera’s business model is a valid one. It draws upon R&D and operations, in the hope of establishing “carrot” licenses, when possible. It has delivered value, but Starboard starboard_logobelieves the ROI is insufficient, and the company would perform better with a more in-your-face, sue first and negotiate later approach.

Starboard is saying that it the company’s share price of about $20.64 and a current market value of just under $1.1 billion does not reflect the company’s true worth, and that its strategy is holding it back. (Starboard does not indicate what is a more accurate valuation.) It makes sense that Tessera’s management would to want to fight for what it believes is a superior approach, but it must be careful what it says and how it conveys it.

In patent licensing today, what may start out as a legal battle may wind up as a customer.

NPEs, with or without operating units, sniping at each other, and separating themselves by claiming to have a superior or more ethical business model play into the hands of IP naysayers, like Sen. Charles Schumer (D-NY).

Schumer recently said that “patent trolls are preying on New York’s technology industry with unwarranted lawsuits, costing legitimate [my italics] companies billions of dollars.” He announced last week that he had introduced new legislation designed to crackdown on a growing problem. (Schumer led the effort to prevent patents held by Data Treasury that read on financial institutions from being enforced.)

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Activist investors have been around for decades. Carl Icahn, among others, have made them famous (or is that infamous?), and many shareholders rich. Icahn, as you may recall, put pressure on Motorola to sell its patents, before the entire company was sold to Google for $12.5 billion. Starboard has brought the challenge of higher value to businesses with significant IP holdings. It played an important role in the AOL’s $1.05 billion portfolio sale to Microsoft, which was in turn partially sold to Facebook.

Named by IAM as one of its IP personalities of 2012, Starboard has history when it comes to shareholder activism and patents. In February 2012, the firm wrote to the board of its AOL investment, criticizing the company’s IP strategy and accusing it of failing to realize the monetization potential of its patent assets. Starboard stated that it would be putting up its own candidates for election to AOL’s board. Within two months, AOL had sold its patent portfolio to Microsoft.

I can understand Tessera’s frustration with having a professional investor looking over its shoulder telling it what strategy it should pursue. However, Starboard is looking for the best return on its investment.

Another Starboard investment is MIPS Technologies, which participated in a November 2012 sale of most of its patents for $350 million to a consortium organized by defensive patent aggregator Allied Security Trust and led by UK semiconductor IP company ARM Holdings.

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IP monetization is a rapidly changing business. When it comes to publicly held companies with significant IP assets its as easy to loose sight of patent quality as it is of market value.

Illustration source: tessera.com; starboardvalue.com

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